Independent contractor or employee?

Published: February 26, 2010

Q.Robert owns a delivery business in rural New Hampshire. He is having difficulty meeting his expenses and plans to lay off several employees who perform services for him and to replace them with independent contractors who will work on demand. The contractors will use their own vehicles, pay their own expenses and manage their own work schedules. What does Robert need to be concerned about as he enters into relationships with these workers?A. In a soft economy, employers reduce workforces to trim the bottom line, and they may look for alternatives to fill the gap. Companies may enter into consulting or independent contractor relationships, but a horse by any other name may still be a horse.A variety of state and federal agencies have jurisdiction over the classification of employees or independent contractors. The Department of Employment Security, Department of Labor and Internal Revenue Service are all keeping a watchful eye on the situation and taking action that can result in significant liability for businesses that make the wrong determination. Each has its own test for determining whether one is an employee.Any of these agencies is empowered to conduct an audit of a company’s business records and payroll records to determine whether violations have occurred.The NHDOL monitors employers’ compliance with the states minimum wage, overtime, safety and workers’ compensation laws. One must meet all of the following criteria to be an independent contractor:• Possess a federal employer identification number or Social Security number or have agreed in writing to carry out the responsibilities imposed on employers• Have control and discretion over the means and manner of performance of the work, in that the result of the work, rather than the means or manner by which the work is performed, is the primary element bargained for by the employer• Have control over the time when the work is performed. (This does not prohibit the employer and worker from agreeing on a completion schedule, range of work hours and maximum number of work hours to be provided by the person)• Hire and pay his or her own assistants and supervise the details of the assistants’ work• Hold himself or herself out to be in business for himself or herself• Have continuing or recurring business liabilities or obligations• The success or failure of the business depends on the relationship of business receipts to expenditures• Receive compensation for work or services performed; remuneration is not determined unilaterally by the hiring party• Be responsible for the main expenses related to the service.• Be responsible for satisfactory completion of work and be held contractually responsible for failure to complete it• Supply the principal tools and instrumentalities used, but the employer may furnish certain unique tools or instrumentalities needed to perform the work• The worker is not required to work exclusively for the employer.
Careful arrangementsThe Department of Employment Security has its own test for purposes of the unemployment statute, known as the “ABC test”:• The individual has been and will continue to be free from control or direction over the performance of the services• The service is either outside the usual course of business for which such service is performed or is performed outside of all the places of business of the enterprise for which such service is performed• The individual is customarily engaged in an independently established trade, occupation, profession or business.In essence, this test imposes a rebuttable presumption that all workers are employees. The employer bears the burden to establish each part of the ABC or the individual will be considered an employee.To help avoid the risk of misclassifying a worker, Robert would be wise to consider the following:• Enter into written independent contractor agreements that show that the relationship meets the criteria set forth under state and federal laws• Make certain that all contractors are operating their own businesses and have federal tax ID numbers• Negotiate a fixed fee for payment for services, rather than paying by the hour or some other way similar to wages• Have the independent contractor use his or her own tools, equipment and other resources to complete the work• Use a Form 1099 (not a W2) to report income to the person.• Classify similarly situated people in the same manner and avoid classifying two people performing the same or similar tasks differentlyFailing to adhere to these principles can result in significant liability to a company for injured workers not covered by workers’ compensation, unpaid wages and overtime and unpaid payroll and unemployment
taxes. Each of the enforcing authorities has significant power to bring actions against employers to collect back taxes and wages, to make the worker whole and to impose fines and penalties.The savings enjoyed by cutting corners may in the long run end up costing the employer far more than he or she could have dreamed.Charla Bizios Stevens, a director and shareholder in the Employment Law Practice Group at the law firm of McLane, Graf, Raulerson & Middleton, can be reached at 603-628-1363 or charla.stevens@mclane.com.

This article appears in the February 26 2010 issue of New Hampshire Business Review